Reich Says Let The Banks Go Bankrupt?

It seems like it:

Back in the banking crisis of 1907, J.P. Morgan got all the major bankers into one room and forced a kind of reorganization on all of them. We need the same today -- a giant reorganization of the banks, in which their shareholders lose what little value they have left, their creditors get paid 20 cents or so on the dollar, and their assets are written down to about 20 percent of their face value. In effect, it's an industry-wide reorganization under bankruptcy. This way, bank balance sheets are cleared up, there's no run on any one bank, everyone starts anew, and taxpayers aren't left holding the bag.

To the extent Geitner is serious about preserving a truly private financial system, this kind of broad-based reorganization of the entire sector in the shadow of bankrutpcy, seems to me to be the best alternative at this point.

Read more here.

Comments

[Bill Woolsey]

Zingales proposed something more or less like this during the fall--Plan B.

Zingales describes it as a debt to equity swap. Current shareholdes are wiped out. The new stockholders are former bank creditors. His
notion was to do this as no taxpayer cost. That
is certainly possible.

You can do this in a way that those whose debt is swapped for equity end up with equity equal in value to the debt, but there would be a taxpayer bailout.

It is cheaper, however, than bailing out the banks by purchasing their bad assets at "book value." Assuming that the banks are meeting capital requirements on the books, and the government really gets all the bad assets, then the banks are "bailed out" of future losses. (To the degree they already have partly written down bad assets, the taxpaper loses less and the stockholders have already taken their losses.)

If they pay less than current book value, they
may just leave the banking system undercapitalized and insolvent.

It is also cheaper than bailing them out with capital injections. That dilutes current ownership and if the bad assets are all properly written down, in the end, the institution is fully capitalized with substantial (maybe vast majority) governmnt ownership.

Reich's worry about the "bad bank" being nationalization because it will hold so many assets is confunsed. The bailed out banks are solvent, sound and fully solvent. Of course, they can be more confident when they lend into
speculative bubble next time. (Don't worry about
losses, that's what taxpayers are for.)

Going back to Zingales (and I guess Reich's proposal,) the cost to the taxpayers can be reduced by swapping more debt for equity and giving the new stockholders stock worth less than the debt they swap.

[Bank account]

If banks declare bankruptcy? will consumers get the same amount of money? with interest or less than what they have expected? And if the financial industry fall how can it recover and how can we? It is too risky.

Nevertheless, seeing banks today, I think that banks have a more chance of surviving in the recession if they stay afloat. Consumers are tightening their belts, so they will likely put more money in banks. As for the loans, I think that banks should offer lower interest rates to entice borrowers to pay their loans. Better to have less than nothing at all right?

[american express]

Of course, FDIC is itself a corporation that can go bankrupt. That's what happened when a large numbers of savings-and-loans went bankrupt all at once, during the 1980s, and FSLIC (the savings-and-loan equivalent of FDIC) couldn't handle that. (A savings and loan is a particular kind of bank, with limitations on the kinds of things it can do.)

[Coles Myer]

If that happens what then? Will consumers get their money with the exact amount which they have deposited? I just hope that doesn't happen for the consumers sake.

[austrianeconomists.typepad.com]

Reich says let the banks go bankrupt.. Great! :)